[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
DOES CHINA ENACT BARRIERS TO FAIR TRADE?
=======================================================================
JOINT HEARING
before the
SUBCOMMITTEE ON RURAL ENTERPRISES, AGRI-
CULTURE AND TECHNOLOGY AND THE SUB-
COMMITTEE ON TAX, FINANCE AND EXPORTS
of the
COMMITTEE ON SMALL BUSINESS
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
WASHINGTON, DC, MAY 26, 2005
__________
Serial No. 109-18
__________
Printed for the use of the Committee on Small Business
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
_______
U.S. GOVERNMENT PRINTING OFFICE
22-205 PDF WASHINGTON : 2005
_________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government
Printing Office Internet: bookstore.gpo.gov Phone: toll free
(866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2250 Mail:
Stop SSOP, Washington, DC 20402-0001
COMMITTEE ON SMALL BUSINESS
DONALD A. MANZULLO, Illinois, Chairman
ROSCOE BARTLETT, Maryland, Vice NYDIA VELAZQUEZ, New York
Chairman JUANITA MILLENDER-McDONALD,
SUE KELLY, New York California
STEVE CHABOT, Ohio TOM UDALL, New Mexico
SAM GRAVES, Missouri DANIEL LIPINSKI, Illinois
TODD AKIN, Missouri ENI FALEOMAVAEGA, American Samoa
BILL SHUSTER, Pennsylvania DONNA CHRISTENSEN, Virgin Islands
MARILYN MUSGRAVE, Colorado DANNY DAVIS, Illinois
JEB BRADLEY, New Hampshire ED CASE, Hawaii
STEVE KING, Iowa MADELEINE BORDALLO, Guam
THADDEUS McCOTTER, Michigan RAUL GRIJALVA, Arizona
RIC KELLER, Florida MICHAEL MICHAUD, Maine
TED POE, Texas LINDA SANCHEZ, California
MICHAEL SODREL, Indiana JOHN BARROW, Georgia
JEFF FORTENBERRY, Nebraska MELISSA BEAN, Illinois
MICHAEL FITZPATRICK, Pennsylvania GWEN MOORE, Wisconsin
LYNN WESTMORELAND, Georgia
LOUIE GOHMERT, Texas
J. Matthew Szymanski, Chief of Staff
Phil Eskeland, Deputy Chief of Staff/Policy Director
Michael Day, Minority Staff Director
SUBCOMMITTEE ON RURAL ENTERPRISES, AGRICULTURE AND TECHNOLOGY
SAM GRAVES, Missouri, Chairman JOHN BARROW, Georgia
STEVE KING, Iowa TOM UDALL, New Mexico
ROSCOE BARTLETT, Maryland MICHAEL MICHAUD, Maine
MICHAEL SODREL, Indiana ED CASE, Hawaii
JEFF FORTENBERRY, Nebraska RAUL GRIJALVA, Arizona
MARILYN MUSGRAVE, Colorado
Piper Largent, Professional Staff
SUBCOMMITTEE ON TAX, FINANCE AND EXPORTS
JEB BRADLEY, New Hampshire Chairman JUANITA MILLENDER-McDONALD,
SUE KELLY, New York California
STEVE CHABOT, Ohio DANIEL LIPINSKI, Illinois
THADDEUS McCOTTER, Michigan ENI F. H. FALEOMAVAEGA, American
RIC KELLER, Florida Samoa
TED POE, Texas DANNY DAVIS, Illinois
JEFF FORTENBERRY, Nebraska ED CASE, Hawaii
MICHAEL FITZPATRICK, Pennsylvania MICHAEL MICHAUD, Maine
MELISSA BEAN, Illinois
Joe Hartz, Professional Staff
(ii)
C O N T E N T S
----------
Witnesses
Page
Pinkos, Mr. Steve, Office of the Undersecretary and Director, US
Patent and Trade Office........................................ 7
Goodpasture, Mr. Tom, Pride Manufacturing Co., Inc............... 17
Iglauer, Mr. Bruce, President and CEO, Alligator Records......... 19
Lubrano, Mr. Al, President, Technical Materials, Inc............. 21
Blackburn, Mr. Dave, Thomas G. Faria Corporation................. 23
Stallings, Mr. Thomas, Funston Gin Company, Funston Warehouse.... 27
Appendix
Opening statements:
Graves, Hon. Sam............................................. 41
Bradley, Hon. Jeb............................................ 43
Barrow, Hon. John............................................ 45
Prepared statements:
Pinkos, Mr. Steve, Office of the Undersecretary and Director,
US Patent and Trade Office................................. 49
Goodpasture, Mr. Tom, Pride Manufacturing Co., Inc........... 63
Iglauer, Mr. Bruce, President and CEO, Alligator Records..... 67
Lubrano, Mr. Al, President, Technical Materials, Inc......... 71
Blackburn, Mr. Dave, Thomas G. Faria Corporation............. 83
Stallings, Mr. Thomas, Funston Gin Company, Funston Warehouse 88
Additional Material:
Discussion of Intellectual Property Theft, Congresswoman
Marsha Blackburn (TN-7), Nashville, TN..................... 100
(iii)
DOES CHINA ENACT BARRIERS TO FAIR TRADE?
----------
THURSDAY, MAY 26, 2005
House of Representatives
Subcommittee on Rural Enterprises, Agriculture and
Technology joint hearing with Subcommittee on Tax,
Finance and Exports
Committee on Small Business
Washington, DC
The Subcommittees met, pursuant to call, at 10:05 a.m. in
Room 2360, Rayburn House Office Building, Hon. Sam Graves,
Chair, Subcommittee on Rural Enterprises, Agriculture and
Technology, presiding.
Present: Representatives Graves, Manzullo, Bradley, Barrow,
Udall, Sodrel, Poe, Fortenberry, Udall, Lipinski
Chairman Graves. Good morning, everyone. I would like to
welcome you to the joint Rural Enterprises, Agriculture and
Technology Subcommittee and the Tax, Finance and Exports
Subcommittee hearing. It is my pleasure to hold this hearing
with Chairman Bradley, and we are going to explore trade
barriers with China.
Trade with China has grown faster than any other U.S.
trading partner. Currently China is our third-largest trading
partner, the second-largest source of U.S. imports, and the
fifth-largest U.S. export market. The growth of the Chinese
economy, in particular, their exports to the United States, has
reached record levels and has created a trade deficit for the
United States topping $162 billion in 2004.
There are several reasons for the discrepancies. First,
since 1994, the Chinese government has kept its currency pegged
at 8.2 yuan to the dollar. While in recent years, the dollar
has weakened, the yuan has remained the same against our
currency. Many economists estimate the yuan is undervalued by
as much as 40 percent, which means Chinese manufactured goods
are 40 percent cheaper than our competitors'. Just last week,
the U.S. Department of Treasury issued a report on the state of
global currencies and called China's currency peg ``highly
distortionary.''
China has experienced economic growth, gains in
productivity, a large export sector, and increased foreign
investment. Their currency manipulation gives their
manufacturers an advantage and creates an enormous disadvantage
to ours. It is about time they stopped cheating and started
playing by the same rules that we have to play by.
Second, theft of intellectual property rights is another
significant problem that U.S. companies must take into account
when dealing with China. It is estimated that counterfeits
constitute between 15 to 20 percent of all products made in
China and account for about 8 percent of China's GDP. It is
also estimated that U.S. companies lose $25 billion annually to
copyright violations. While many people believe that the
problem is restricted to things like CDs, purses and Polo
shirts, it is only the tip of the iceberg.
Many people believe that it is a victimless crime, but,
unfortunately, Chinese counterfeiters or pirated items can
impact our safety. For example, in 2000, the New York Times
reported that Southwest Airlines discovered that counterfeit
cables had been installed in 47 of its planes. These cables are
used to connect cockpit controls to the engines, the landing
gear to control surfaces. One of Southwest Airlines' suppliers
had obviously bought counterfeit parts.
Over the last two decades, the U.S. has pressed China to
improve its protection of Intellectual Property Rights. While
China has passed new laws that provide protection of
Intellectual Property Rights, it has done little to enforce
these laws, allowing for rampant piracy and counterfeiting.
China has got to crack down and be an active part of the
solution.
And, finally, while the Chinese have some laws that protect
its workers and protect the environment, few are ever enforced.
U.S. companies are held to some of the highest standards in the
world, and these standards are noticeably absent in China.
Chinese companies just do not have to comply with things like
OSHA or the EPA. We need to ensure that U.S. firms compete on a
level playing field and the global market not be at a
competitive disadvantage. These unfair barriers not only affect
our economy but also job growth, and much of it is fueled by
small business in this country.
Again, I want to thank all of the witnesses that are going
to participate today, and I look forward to hearing everybody's
statements.
[Chairman Graves' opening statement may be found in the
appendix.]
Chairman Graves. Ranking Member Barrow. Do you want to give
your opening statement?
Mr. Barrow. Thank you, Mr. Chairman.
For many generations, my family has farmed all over eastern
and southeastern Georgia, and I learned very early on to
appreciate the hard work and sacrifice of our family farmers.
Not only is farming an industry with tremendous challenges; it
is also an industry that impacts the entire world. Our farmers
face the pressures of supplying the world with food and
clothing, and this is no easy task. The policies enacted by
Congress, as well as by foreign governments, have a major
impact on our family farmers. Recognizing this, I would like to
thank Chairman Graves and Chairman Bradley for holding this
hearing to examine China's impact on fair trade.
I have asked a fellow Georgian to come join us today to
talk about the cotton industry in Georgia and nationwide and
how China's trade policies are affecting this industry. Mr.
Stallings, Tom Stallings, is a cotton producer from Funston,
Georgia, and I thank him for taking the trip up here and
participating in this hearing.
The ever-increasing number of imports and exports crossing
our borders illustrates the importance of the international
trade market, particularly in the U.S. In fact, the global
economy has grown so much that 80 percent of world economic
consumption takes place outside of this country. In today's
global market, it is that much more important that our family
farmers compete on a level playing field.
Much of this country's success in the world market depends
on small businesses and agriculture. Today, 90 percent of
exporters are small businesses, and they make up over 50
percent of our nation's GDP. This includes many of our family
farms. While access to overseas markets is important to our
economy, we need to examine the impact that trade policy has on
small business exporters in this country.
China is our third-largest trading partner. We are China's
largest overseas market, and China's exports represent 13
percent of U.S. imports. U.S. exports to China have been
growing rapidly, but competition from China is one of the
biggest threats facing the small business sector of the
American economy. Meanwhile, while U.S. exports are increasing,
the numbers do not add up. In 2004, the U.S. ran a trade
deficit of $162 billion with China, our largest trade deficit
with any other country. These figures spell trouble for our
trade relationship with China where we sustain a huge imbalance
between what U.S. exporters send and what U.S. imports receive
in return.
My home state of Georgia plays an integral role in U.S.
exports. Georgia exported $16.3 billion in goods in 2003, with
agriculture accounting for more than $963 million in sales
abroad. Cotton plays a big role in these figures. Cotton is
Georgia's top agricultural export, and it is an industry with a
unique relationship with China.
Today's hearing will provide us with an opportunity to
learn more about the unfair factors influencing U.S.-China
trade relations and to examine the intricate relationship that
U.S. industries have with China. Specifically, we will hear
testimony on unfair trading practices associated with currency
manipulation, intellectual property piracy, and a lack of
compliance with labor standards and other regulations.
When it comes to setting currency regulations, China is not
playing fair. This manipulation makes Chinese exports to the
U.S. cheaper and U.S. exports to China more expensive.
When it comes to honoring or defending our property rights,
China is not playing fair. Piracy and counterfeiting practices
in China are costing U.S. firms billions of dollars in lost
sales.
And, finally, when it comes to respecting honest and
adequate labor and environmental standards, China is not
playing fair. The production of more goods at lower costs
should not be done at the expense of public safety,
environmental standards, or the rights of workers.
This is the case, and these are the facts, and unless China
starts playing by the same rules, rules that they agreed to
when they joined the WTO, Chinese exporters will continue to
have an enormous advantage over U.S. firms. In the global
marketplace, we have got to stand up for American interests.
Standing by while small businesses, family farms, and American
workers lose out is just not an option. Thank you, Mr.
Chairman.
[Ranking Member Barrow's opening statement may be found in
the appendix.]
Chairman Graves. Next, we are going to hear from Chairman
Manzullo, who is Chairman of the full Committee on Small
Business. I am very pleased to have the chairman here. He has
been very active in trade issues with China and, obviously,
represents a very important manufacturing area in the United
States.
Thank you for being here.
Mr. Manzullo. Thank you, Chairmen Graves and Bradley for
holding a hearing on this very timely topic. The simple answer
to the question, ``Does China Enact Barriers to Fair Trade?'' I
guess, to free and fair trade, the answer is, obviously, yes.
The most recent, monthly, merchandise-trade-deficit
statistic with China was $14 billion. We are on a pace this
year to eclipse the already massive $162 billion trade deficit
from 2004 with China. Many of the challenges to the U.S.-China
economic relationship are the same ones that were discussed
several years ago, with little progress in sight while our
manufacturing and agricultural base hemorrhaged. Last week, the
Federal Reserve issued a depressing industrial production
report showing a .2 percent decline in April led by motor
vehicle manufacturing. The Commerce Department reported
yesterday that durable goods orders were up last month but
still remained at the same level at the start of the year.
While we gained 274,000 jobs last month, we lost 6,000 jobs in
the manufacturing sector.
What will it take for this town to recognize that there is
a crisis in manufacturing? It seems every month there is
another major, U.S. multinational company that announces it
will open a leading-edge, global research and development
center in China. Just last month, two major U.S. car makers
announced that they plan to export vehicles manufactured in
China to the U.S. and Europe. To compound that, China is
manufacturing the Khiri, they expect to send one million of
those to this country each year. That is about one-twentieth,
or 5 percent, of all of the cars sold in this country, and GM
is involved in a massive lawsuit with Khiri over pirating.
We need to make sure that China plays by the rules of free
and fair trade. We can do this by, one, allowing all of our
trade laws to apply to nonmarket economies like China.
Currently no company can file a countervailing duty trade
against China. Market-driven companies in the U.S. cannot
compete against state-owned enterprises in China. Passage of
Representative Ingrich's H.R. 1216 can go a long way towards
rectifying this problem.
Two, let us require China to live up to its prominent,
global economic role by letting the markets, not governments,
determine the value of their currency. The U.S. Department of
Treasury must find what is obvious to everybody, that China
manipulates its currency every day in order to maintain its
tight peg to the U.S. dollar. The level has not been changed
since 1994, and China is long due for a correction in its
currency value to reflect its global economic prowess.
Passage of H.R. 1498, to allow countervailing duty trade
cases against companies in countries that manipulate their
currency can help in this effort. Also, passage of my
legislation, H.R. 2208, would give Treasury the legal room
necessary to take action against countries that manipulate
their currency like China, which have a large trade surplus
with the U.S. but not with the rest of the world.
The reason the U.S. Treasury has not cited China for
manipulating the currency is that under the present rules of
doing so, you have to show a trade imbalance, both bilaterally
and on a multinational basis, and as to the latter, China is
not there, although we question the methods that they used to
come up with their own figures. H.R. 2208 would change the
metrics and make it a lot easier to show that China is
manipulating its currency and thus be able to take actions
against that country.
Three, we have to continue to fight the Intellectual
Property Right piracy in China. As the Chairman of the
American-Chinese Interparliamentary Exchange, I have been to
China several times, Macau on two of those trips, and it is
absolutely rampant what is going on there with the pirating of
the CDs and other things. Piracy costs U.S. exporters billions
in lost sales. The Administration's Stop program and elevating
China to the Priority Watch List are good steps, but,
obviously, more needs to be done. Passage into law of H.R. 32,
which would crack down on those who traffick in counterfeit
goods and services would also help.
The U.S. Trade Representative initiated a WTO case against
China on Intellectual Property Rights enforcement, if progress
is not made shortly, should also be strongly considered. Mr.
Chairman, thank you again for holding this timely hearing.
Chairman Graves. Thank you, Mr. Chairman. We are now going
to hear from Jim Bradley. Chairman Bradley, I appreciate you
working with us on this joint hearing, and I look forward to
hearing your statement.
Mr. Bradley. Thank you very much, Mr. Chairman. It is a
pleasure to be here. Good morning to everyone. I appreciate
your joining us here today.
I am also very appreciative of the gentleman from Missouri,
Chairman Graves, for conducting this hearing, and I look
forward to working on these issues as we move forward.
As all of you know, over the last two decades, China has
emerged as a strong international competitor in a wide range of
products and has proven to be a critical market for U.S.
exports. China's emergence as a leading world economy has
provided significant new opportunities for American exporters,
and U.S. exports to China have risen sharply in recent years.
That rapid growth has raised China from the tenth-largest U.S.
export market in 1997 to the fifth-largest today. In fact,
between 2000 and 2004, exports to China accounted for half of
the increase in the total U.S. exports worldwide, an increase
of $18.5 billion.
Unfortunately, there has been a down side to the
unprecedented growth in China's economy as well. The deficit
for trading goods with China stands at about $176 billion,
having increased rapidly in recent years. It is now the single-
largest, bilateral deficit our country has. We are asking
ourselves in these hearings and others, what has caused this
deficit?
There are numerous trade irregularities that exist between
our nations, and this hearing is going to focus on three of
them: China's undervalued monetary system, the lack of
intellectual property protection and enforcement in China, and
the lack of enforcement of Chinese regulations to protect
workers' rights and the environment.
In 1994, China devalued its currency by roughly 30 percent
and has maintained that value to this date, despite increases
in production capability, productivity, quality, foreign direct
investment, and other factors that would normally be expected
to cause a currency to appreciate. This undervaluation
effectively increases the cost of U.S. exports to China and
lowers the cost of Chinese exports to America, which only
exacerbates the growing bilateral trade deficit between our two
nations.
Turning to intellectual property, IP protection is another
area of concern for U.S. exporters to China. According to the
U.S. Patent and Trademark Office, China is the largest single
source of seizures of infringing products by U.S. Customs,
roughly 62.5 million, or 66 percent of the total goods seized
in Fiscal Year 2003. While some progress has undoubtedly been
made between our two nations in this regard, these new
mechanisms are not being rigorously enforced by the Chinese
officials, leading some industry analysts to estimate that IP
counterfeiting and piracy in China costs U.S. copyright firms
$2.5 billion in lost sales in 2004.
That is why we are having a hearing today, Mr. Chairman,
and I appreciate your leadership on this and look forward to
continuing to work with you.
[Chairman Bradley's opening statement may be found in the
appendix.]
Chairman Graves. Thank you, Mr. Chairman. Any other
statements?
Mr. Sodrel. A short statement. I think, in the opening
statements, and I would also like to thank Chairman Graves,
Chairman Bradley, and Chairman Manzullo for having the hearing,
the case has been stated very well in terms of statistics and
problem, but just as some anecdotal stories, the Ninth District
of Indiana depends heavily on manufacturing and agriculture,
and those are two ways our folks make a living. Keller
Manufacturing in Cordon, Indiana, had 1,000 employees six years
ago; they have 50 today. We have experienced, both with small
machine shops, tool and die shops, manufacturers all over the
Ninth District have found their employment curtailed because of
Chinese trade and unfair practices in China.
So it is a really serious issue in southern Indiana, and I
think we need to take appropriate action. Thank you for the
opportunity to be here today this morning.
Chairman Graves. Thank you.
Mr. Poe. Thank you, Mr. Chairman. Thank you very much. I
appreciate this hearing being held. As a former judge in Texas
for over 20 years, I believe strongly that people who cheat and
steal should have consequences for that conduct. It is obvious
we know the problem,--the Chinese are harboring pirates and
cheats and thieves--and I hope we can find some solutions as to
what the United States is going to do about it because of the
consequences here in the United States to American workers, but
also there should be consequences abroad for stealing,
cheating, and pirating. Thank you, Mr. Chairman.
Chairman Graves. Thank you very much.
Mr. Udall. Thank you, Chairman Graves, and I appreciate you
holding this hearing today. Many of the opening statements, I
think, covered very well the topics we are going to address
today, and I would agree with all of those statements.
The only thing I would like to add is that I do not think
that when we deal with China, we have a level playing field,
and you can look at a number of areas. The trade deficit has
been mentioned. Low wage workers are an area where there is
absolutely no doubt, we do not have a level playing field.
There are no labor standards. In many cases, with these recent
exposes, we have seen child labor used specifically to produce
their products and thus lower the prices, and that is something
I do not think we can tolerate.
In addition, the human rights situation, I think, is
deplorable. We are talking about these large education camps,
people that cannot practice their religion, and there is
really, in many cases, no rule of law, it seems to me, in terms
of people's rights and their ability to be treated fairly in a
legal system.
So with that, I look forward to the hearing and look
forward to hearing from our witnesses.
Chairman Graves. Thank you very much.
We have two panels today, and, obviously, all of the
statements made by the Members on the Committee and the
panelists will be placed in the record in their entirety.
Our first panel is Steve Pinkos. He is with the Office of
the Under Secretary and Director with the U.S. Patent and Trade
Office, and we are looking forward to hearing. We actually had
someone from your office in our district talking about some of
the patent infringements that have taken place, and it is
extremely interesting, and I look forward to hearing your
testimony.
STATEMENT OF STEPHEN M. PINKOS, U.S. PATENT AND TRADEMARK
OFFICE
Mr. Pinkos. Thank you very much, Mr. Chairman. Thank you,
Chairman Graves, Chairman Bradley, Chairman Manzullo, Ranking
Member Barrow, other members of the Subcommittees. I appreciate
the opportunity to come join you all today in a discussion on
some of the issues that we are facing in China. My alleged area
of expertise is intellectual property. That is what we handle
at the U.S. Patent and Trademark Office. It is the one
executive branch agency that solely focuses on intellectual
property. Currency, agriculture, textiles, labor issues are not
necessarily my bailiwick, but I would be happy to entertain
what questions I could, but I will focus my testimony on the
intellectual property situation in China.
The Bush administration and Secretary Gutierrez fully
understand that intellectual property is critical to the
competitiveness of our economy and that U.S. industries, both
large and small, face enormous challenges in protecting their
intellectual property overseas, particularly in China, and we
know that U.S. businesses, as it has been alluded to, lose
billions of dollars per year from IP theft abroad.
An effective intellectual property framework requires not
only effective laws on the books but effective enforcement and
administration of those laws, and we have seen some progress in
China and other countries in putting the laws on the books that
may be required by the WTO obligations, but the administration
and enforcement of those laws is often sorely lacking or
deficient, China being the prime example.
There, again, as it has been alluded to, the problems run
the gamut, from piracy of movies and software, devastating
those industries in China, and the music industry to
counterfeiting of all types of consumer goods, electrical
equipment, pharmaceuticals, and, as Chairman Manzullo said,
even a whole car.
We know there is a huge counterfeiting problem in a country
when a company is willing to make the investment in a
production line for a counterfeit good, knowing that there are
probably no implications from their own government.
That is a huge concern, and there are safety concerns that
go along with that: exploding electronic devices,
pharmaceuticals that do not have the active ingredients so your
mother or father or mine could be taking blood pressure
medicine for several months that has none of the intended
effect.
So there is a whole range of issues that are of concern to,
I know, you all and, of course, the Bush administration. We
have made dealing with U.S. IPR problems a top priority, and I
just want to go through a few of the things that we are working
on. Much of it is covered in the written testimony, if you have
a chance to look at that, and I would be happy to entertain
some questions.
One thing that is going on this week is there is a U.S.-
China Joint Commission on Commerce and Trade that has been set
up, and there is an IP working group that is co-chaired by John
Dudas, the Under Secretary of Commerce for Intellectual
Property and Director of the US PTO, and Josette Shiner from
the USTR's office. They are meeting with Chinese counterparts
this week and pressing them very hard to implement an IPR
action plan to address some specific problems.
Part of the equation is that companies need to protect
their rights in China. They need to actively go and get patents
and protect their trademarks there because there is no such
thing as an international patent or an international trademark,
so they do have to seek protection in the individual countries.
Obviously, we have 4,000 patent examiners and over 300
trademark examiners, so we have developed a lot of expertise in
that area. So we are working with their administrative offices
to improve their systems so when American companies do go there
to try to protect their rights, there is an adequate system in
place.
So we are spending a lot of time training there, and we are
training on enforcement issues as well. That is, as was touched
upon earlier, a big part of the equation. So we run programs
throughout China, not just in Beijing but the other provinces,
training judges and prosecutors and legislators and
administrative officials on how to enforce intellectual
property laws and also the general value of intellectual
property and how eventually it will be helpful to their
economy, and in the long term, cheating, stealing, and pirating
is not the way to develop an economy.
Many of you may have traveled to China and know a lot of
the small business community staff has been there. We have
placed an IPR attache in the embassy there that has really
reaped some good benefits. It is a unique position that we have
established with the State Department. All he does, Mark Cohen,
is focus on IPR issues, so he is really building a strong
relationship not only with the U.S. businesses there but also
with the Chinese government and trying to make some inroads
there.
It is interesting that the Chinese have taken some steps.
They have a massive public-interest campaign. They prosecute
people now and then. Some of the counterfeiting sales has gone
underground, but there is no question. All you have to do is go
there or see some of the products coming into the United States
in the huge amount of seizures that Customs is making to know
that the problem is continuing.
I see that my time is expiring, so having worked for
Chairman Sensenbrenner for several years and Mr. Hyde on the
Hill, I have deep respect for the red light. I would be happy
to take your questions and just emphasize that we are
committed, the Bush administration, the USPTO, Commerce
Secretary Gutierrez, to working closely with the
administration,--like-minded trading partners around the world
is a big factor in the equation--and working with Congress to
continue to address this problem. I am increasingly optimistic
that we are making some progress, but we have got to push more
on some other levers to hopefully see real results.
[Mr. Pinkos' statement may be found in the appendix.]
Chairman Graves. You mentioned making progress, obviously.
Can you tell us what areas? Are we seeing real progress, or is
it superficial?
Mr. Pinkos. It is sporadic, and it is not sustained. For
example, we help the Chinese to have more effective laws on the
books, including copyright Internet laws, but then we see mild
enforcement or not pervasive enforcement, and it does not bleed
down to the provincial level necessarily.
The U.S. government has a complex bureaucracy. Well, they
have taken it to new heights there. So a lot of times, we do
not even know the best people to deal with. But we have made
progress in getting some better laws on the books. We have made
some progress in pressing some particular cases. For example,
the Chinese were not adopting the trademark principle of a
widely recognized trademark, like Coca-Cola or Nike, that it is
written into general trademark law that they should receive
recognition without having to file the particular paperwork. We
have pressed them on that and seen some results.
So, case by case, little by little, we are seeing a little
bit of results, but, again, no question that there is still a
huge problem.
Chairman Graves. Let me ask you this. What can U.S.
businesses do to protect themselves, other than revealing what
their latest-and-greatest product is? It is obviously easy to
obtain that. What can they do?
Mr. Pinkos. Well, first of all, they do need to take the
step of actually filing for a patent or filing a trademark
application because you do not have the protection otherwise,
at least within China. You may have it in the United States if
they try to export it here.
You have to take that first step, and we are really trying
to do a lot to educate especially small businesses, because the
big multinationals, they have their teams of lawyers, and they
know what they need to do. But we are reaching out specifically
to small- and medium-sized businesses. We have a public
awareness campaign that we are launching in June. We are going
to have an event here in D.C. that we would love for you all to
attend. We will get the information to your staffs.
But we are also going around the country doing small
business seminars. We had our first one this week in Utah where
over 200 small businesses were represented, and we talked to
them about the international landscape, what is out there. You
may have your product, and you are selling it just in the
Western Hemisphere, but it may be something that is easily
copied and will be manufactured in China and tried to be
exported back to Central America or something. So we educate
them about what may happen to them and what steps they need to
protect their intellectual property.
Chairman Graves. Mr. Barrow?
Mr. Barrow. Thank you, Mr. Pinkos. I appreciate your being
here today. I want to ask you some questions that come at this
from the small business perspective, and then I want to ask you
a couple of broader questions.
First of all, you mentioned the fact that seminars are
being held around the country to try and emote an awareness on
the part of the small business community as to the assistance
available. What efforts are being made to make sure that the
small business community is even aware of these outreach
programs? How are you all reaching out to the small business
community?
Mr. Pinkos. Part of the program that we are going to launch
in June is we are trying the target publications that small
businesses often rely on. We are going to do some Internet
advertising. We will probably do some paid media advertising
and target other sorts of small business conventions and things
like that that are occurring in small businesses.
They participate in local chambers of commerce, reaching
out and trying the partner with the NFIB to get out the message
that we do have resources to help, that we have an 800 number
they can call and talk to an attorney for some advice. The
government attorney cannot give them the real legal advice like
a regular attorney can, but they can reach out to our office
through that and through a new Web site the U.S. government has
established called stopfakes.gov.
Mr. Barrow. What you just said touches on a point that you
made before, and that is, to contrast the resources that are
available to giant corporations that are able to put up a fight
in their own defense, and that just only brings to mind the
obvious problem that small businesses have. It is one thing to
advise small business as to how to acquire the rights that they
own in their property; it is another to provide a remedy for
them. And basically tell folks how they can go about getting a
patent and what they need to be able to do in order to be able
to, first, secure their rights on their property is not really
doing anything. A right without a remedy is worthless.
What really is it going to take for this culture of
compliance and respect for foreign property rights really to
bleed down, to use your phrase, in the Chinese economy? What is
it going to take? You mentioned that the progress we are making
is inch by inch, and little by little, we are getting there,
but what is it really going to take for us to create a climate
or a culture of acceptance of the rights of foreign
intellectual property in the Chinese economy?
Mr. Pinkos. Ultimately, it will take a recognition by the
Chinese that it is beneficial to their interests, and that can
come about in several ways: one, through their own economic
development. Chinese innovators are starting to feel the pain
themselves in the sense that they are developing a product,
they are investing the money in it, and somebody in another
province--they are equal-opportunity counterfeiters. They do
not just counterfeit American products or European products, so
that is part of the equation.
Ultimately, also, I think that world pressure on the
Chinese not just from the United States because they certainly
have other markets they can turn to. It is not just Boeing;
there is Airbus. There are plenty of competitors, so I think it
is going to take a sustained world effort to convince them that
it is not in their best interest, and there are mechanisms
through the WTO and other sort of international fora to try to
accomplish that.
Mr. Barrow. Well, I hear what you are saying, but stamping
out counterfeiting at home in the domestic market does not do
us any good if counterfeiting persists with respect to the
intellectual property rights of foreign intellectual property
owners. If you stop the counterfeiting of Chinese intellectual
property in the Chinese economy, you have not done anything to
protect the rights of American intellectual property in the
Chinese economy.
That is one concern I would have, but, secondly, what is
the world pressure going to have to look like? What form is it
going to have to take in order to be able to produce the effect
that we all think we are entitled to?
Mr. Pinkos. One, I think it has to take just a unified
perspective, in the sense that we have to be on the same page,
and other countries do not have to be looking for their own
little economic angle and try to curry favor, so to speak, with
the Chinese. Ultimately, I think that it may be something that
is examined or played out in the World Trade Organization.
Mr. Barrow. Can you expand on your answer?
Mr. Pinkos. Well, China is a member of the World Trade
Organization. They have obligations, including enforcement of
intellectual property laws, and no one has ever brought a case
in the World Trade Organization on an enforcement. Usually, it
is that you do not have laws on the books that comport with WTO
obligations, or you pass something that conflicts with WTO
obligations, so it is sort of a new, novel approach, but the
obligations are there on the books. I think the administration,
at this point, is assessing fully what we are doing in China,
what is working, what is not working, and what other avenues we
have to address.
Mr. Barrow. Is the administration prepared to take our case
to the WTO, the case that laws on the books do not amount to
nothing if they are not being enforced?
Mr. Pinkos. We are examining that issue right now.
Mr. Barrow. When do you think the administration is
prepared to take a position on that?
Mr. Pinkos. I am not certain, is the answer to that. There
are a couple of things that have to be in line. One, we have to
gather the evidence. Some of it seems quite obvious on its
face. There are some small businesses, in particular, that are
losing their whole livelihood, but that is good evidence.
Evidence from multinational corporations is sometimes a little
more difficult to come by because they do not want to be
singled out by the Chinese and have retribution placed upon
them.
So one of it is the evidence-gathering process, making sure
that we could win a case, and it would have the effects that we
hope that it would, and enlisting, hopefully, some support from
other trading partners internationally.
Mr. Barrow. Thank you, sir. Thank you, Mr. Chairman.
Chairman Graves. Chairman Bradley?
Mr. Bradley. Thank you very much, Mr. Chairman.
It would appear that the administration has heightened the
scrutiny on China not just on intellectual property in the last
several months, inasmuch as the tariffs on apparel, the Senate
taking action on a 25-percent tariff. So these are all pushing
in that direction.
I guess my questions are, number one, what leverage do you
have, does the administration have in the patent office, to
better enforce the laws? That would be Question No. 1. Number
2: Is there a need for Congress to take action to give you more
authority to enforce the laws? Answer those first, and then I
will ask my next question.
Mr. Pinkos. The answer to your second question: I do not
know that Congress could give us more authority to enforce the
laws. We do not have the authority to enforce laws in China,
obviously.
Mr. Bradley. Not enforce the laws, but is there something
that we could be doing to give you greater leverage, and what
leverage do you have other than WTO?
Mr. Pinkos. I think the level we have involves a lot of the
other issues that have come up today. It is multifaceted,
multi-issues. Some of the other issues related to agriculture
or textiles and other industries can relate and play into IP.
Basically, a lot of it is diplomatic leverage and pressure from
high-level officials, all the way up to the president, and
building pressure internationally. Ultimately, we do have some
trade sanction, not being with the USTR, but there are some
trade-sanction possibilities that are out there that we have.
Mr. Bradley. Well, sort of following up on my colleague,
Mr. Barrow's, question, we all went through, in the last
session of Congress, the debate about FISC-ETI, and that was a
result of the European Union taking action against the United
States at the WTO. It would seem to me, based on your testimony
and the information that all of us were talking about in our
opening statements, that cases are out there to be made.
Clearly, you have to have the example, and you have to have
done the homework to bring a case that is going to succeed at
WTO because you do not want to fail.
I think it is pretty straightforward, I agree, and I
suspect all of us would agree that this has, so far, been a
very bipartisan hearing, which is refreshing, and I would urge,
my voice certainly, that your office continue to pursue this
and build that case so that knowing what happened and how we
had to change our corporate tax laws last year because of FISC-
ETI and the European Union case, that we also build that case
to WTO because it would appear, and that is what I was getting
to in my first question, the leverage that we have, more than
anything else, is WTO. We know what WTO sanctions meant for us
in FISC-ETI. Turning the table, I think, would be the most
helpful, especially in this area of patent law. We probably
have more opportunities there than we do in currency. We will
turn to that in the next panel. So I would urge you to keep the
pressure on and build that case.
Mr. Pinkos. I appreciate that, sir.
Chairman Graves. Mr. Udall?
Mr. Udall. What programs does your office have in place to
protect the intellectual property of U.S. small businesses?
Mr. Pinkos. Well, first of all, in our fee schedule, we
have quite a discount for small- and medium-sized enterprises.
We try to make it affordable, but there is some cost associated
with it. We also have people in our office who are focused on
small business concerns. We try to have a very helpful Web
site. A lot of small inventors will go to the Web site, and it
will have information about who they can contact in the office,
and we will try to provide them direct assistance.
Every year, we have a specific, independent inventors'
conference that is widely attended. Last year, it was up in
Concord, New Hampshire. But now we are really expanding that
through these seminars around the country. In fact, we were in
Utah just Monday and Tuesday of this week, and we will be going
to several other cities and focusing on China as well. We did
one in Baltimore that was China specific.
So it is basically we are trying to reach out because we
have people at the office who can assist them and explain to
them the steps they need to take to protect their rights.
Mr. Udall. But as I understand it today, you are not asking
for any new authority in order to protect the intellectual
property of U.S. companies.
Mr. Pinkos. No, sir.
Mr. Udall. Is it possible for a small U.S. business that
does not export to be a victim of intellectual property piracy?
Mr. Pinkos. Yes, it is.
Mr. Udall. What would be that company's remedies?
Mr. Pinkos. Somewhat limited. As I have mentioned, there is
no international patent or international trademark, so that is
one of the things we try to touch upon is that even if you are
not thinking about marketing in China, if you have the
resources, which I know a lot of companies do not, but it may
be beneficial to protect your rights there, so you would have a
remedy of going in and trying to enforce your rights there.
Mr. Udall. When you say there is no international patent,
is there a push to do that in any of the forums that exist out
there on an international basis, that it is respected by all of
the countries in the world?
Mr. Pinkos. What we work on rather extensively is, at
least, harmonization of laws so the process is easier, once you
have a patent in one country, to apply in another country.
There is a treaty out there called the Patent Cooperation
Treaty that is administered through the World Intellectual
Property Organization that helps with that. Probably, you would
have immense sovereignty issues here in the United States if,
for example, somebody was granted a patent in Brazil, and they
wanted to say this should be good in the United States. A lot
of people in the United States might have qualms with the
standards that they set and want some sort of review to occur
in the United States.
I am not sure there would be the political support for a
full, internationally recognized patent examined on one country
automatically accepted in another, but if we come closer
together on what the standards are and the formalities, then I
think that will be helpful, and that is what we are striving to
achieve.
Mr. Udall. Thank you very much. Thanks, Chairman Graves.
Chairman Graves. Thank you, Mr. Udall. Mr. Sodrel?
Mr. Sodrel. I do not have any questions at this time. Thank
you.
Chairman Graves. Mr. Poe?
Mr. Poe. Thank you, Mr. Chairman.
Thank you again, Mr. Pinkos, for being here today.
Based on what you said, it seems like China has adopted the
flag of the skull and crossbones when it comes to international
theft and piracy and cheating, especially when it comes to
American products and counterfeiting American products.
I have three questions for you. First, what happens to
those counterfeit goods when they come to the United States,
and they are seized?
Mr. Pinkos. I am not completely certain, and, in fact, I
think that they are not all destroyed. I would have to check
with my colleagues in the Customs Department. I think H.R. 32
may address that as well, that just recently was considered by
the House. So I could get back to you on
that.
Mr. Poe. The second question is, of the numerous industries
that you have mentioned and that the other members that are
going to testify have said in their statements, which one do
you personally think in the United States is hurt the most
because of the counterfeiting and fraud by the Chinese?
Mr. Pinkos. Currently, I would probably say copyright
industry specifically because software piracy is, I believe, up
over 90 percent, and software now, or copyright-related
industries, is now the single-largest U.S. export, and it is
not just movies and music but also software and publications
and other sorts of things.
Mr. Poe. Could you give me a monetary amount on that,
roughly speaking?
Mr. Pinkos. I do not have the figure off the top of my
head, but some of the private sector witnesses after me may. It
is in the tens of billions of dollars, I believe, but I do not
know the precise figure, sir.
Mr. Poe. A lot of money. The last question was, do other
countries have the same problem that we do when it comes to
this type of fraud, and what are they doing about it?
Mr. Pinkos. Yes. Other countries are experiencing the same
problems, and I do not even think that they are as aggressive
as the U.S., necessarily. Some are. The EU and Japan, in
particular, are trying the make a difference in China. But
interestingly, it is not just developed countries. They are
seeing in Morocco counterfeit Moroccan CDs that were produced
in China and made their way to Morocco. Border countries along
China's borders are seeing their products counterfeited in
China.
So I think it is a great opportunity to reach out to not
just the normal trading partners but to developing countries as
well to elicit their support in addressing this problem.
Mr. Poe. Thank you very much. I look forward to the
administration's vigorous enforcement of international law as
well as protecting American businesses.
Mr. Pinkos. Thank you, sir.
Mr. Poe. Thank you, Mr. Chairman.
Chairman Graves. Mr. Fortenberry?
Mr. Fortenberry. No questions at this time, Mr. Chairman.
Thanks.
Chairman Graves. I do not think we have any more questions
at this point. We are going to go ahead and seat the second
panel. I do want to tell everybody that we are going to have a
vote sometime between 11 and 11:30, which may disrupt us for a
little bit. It should not be too terribly long, but we will go
ahead and seat the second panel.
Mr. Pinkos, I appreciate you being here and coming over
today. I appreciate your testimony. We, obviously, have a very
tough problem there and a very tough problem to try to enforce,
but I appreciate what your office is trying to do. Thank you
for being here.
Mr. Pinkos. Thanks for having me. I appreciate it. Thank
you.
Chairman Graves. In the interest of time, we will go ahead
and continue. For the witnesses' information, that little light
box in front of you kind of gives you an idea of where you are
in your testimony, and we ask that you try to limit it to five
minutes. The red light will come on when that time is up.
Now, I do not throw anybody out for going over. If you have
got something to say, I encourage you to say it, but in the
interest of time, so we can get through all of our witnesses
and the questions, please at least try to observe that, but,
again, we are not too hard core when it comes to that.
Our first panelist is Tom Goodpasture with Pride
Manufacturing in Liberty, Missouri, which is my district. Tom,
I appreciate you coming out; it is a long way. Obviously, many
of the panelists have come a long ways today, and I very much
appreciate you being here on a very important issue as pertains
to small business, and I look forward to hearing your
testimony. We will go through all of the panelists, and then we
will go to questions. Tom?
STATEMENTS OF TOM GOODPASTURE, PRIDE MANUFACTURING COMPANY,
INC.
Mr. Goodpasture. Thank you, Chairman Graves, and thank you,
all of the Committee, for having me here. I appreciate the
opportunity.
My name is Tom Goodpasture, president and owner of Pride
Manufacturing, a small machine shop in Liberty, Missouri. In
2002, we purchased a minority of stock in a manufacturing firm
in Ninbo, China. The principal owner is a family member, and
Pride Manufacturing wanted to use this association primarily as
a sales tool. It has been an interesting process that has given
me a new insight into the China market. I have never been to
China, but I will be traveling there this fall on a study
mission trip with the NTMA [National Tool and Machine
Association].
The unlevel playing field for us as American manufacturers
has make it impossible to compete. At Pride Manufacturing, our
cost burden over wages, including benefits, averages in excess
of 35 percent. In China, there are no labor laws, no EPA laws,
no OSHA laws, no health insurance, and no retirement plans. The
biggest benefit provided is buying the workers lunch.
I routinely talk to customers and representatives of large
and small American manufacturers who feel the only way they can
survive is to buy in China. At Pride, we purchased a $300,000
robot-loaded CNC lathe to do a job for Mercury Marine. The cost
of the part was approximately $3. We were producing on the most
up-to-date equipment and technology available, yielding under a
5 percent profit margin. We were six months into the project,
and the purchasing agent found that he could buy in China for
50 percent, and it was gone.
Customers buying China are willing to accept the 5 to 10
percent or more scrap level at this time, which has to be
sorted and quality controlled here. There is no way to recoup
the loss, but they feel the competition is ``buying'' China, so
they must also. The rate of defect would not be allowed from
U.S. manufacturers.
Many companies are starting their own plants or attempting
to partner with the Chinese firms to produce their products.
Some succeed, many fail, and there are many horror stories
along the way. The common theme from my entire group of
associates who have anything to do with China is, ``Regarding
business, you cannot trust the Chinese.''
Why have we embraced the idea and monetarily forced U.S.
manufacturers to by China to be competitive? I believe that
China has made the wise, wise choice to purchase their future
in the world of manufacturing at our expense and demise. With
all of the challenges of doing business with China, if the
Chinese currency was correctly valued, I wonder how many would
actively be pursuing services there? With that correct exchange
rate, it is my belief that China could no longer be competitive
in the world market of manufacturing.
I do not believe that the average Chinese shop operates
nearly as efficiently or accurately as shops in the U.S. That
is the major reason for my fall trip: to verify or alter my
opinion. With this undervalued exchange rate, China is buying,
and we are, either knowingly or blindly, selling 100-plus years
of technology in a very short time. China wins, and we lose.
About the time of Desert Storm, I remember a huge
controversy when an American cutting tool company was found to
have allowed one of their tools to get in the hands of a non-
allies machine shop. That tool was found to be producing
weaponry that could be used against us. I realize that trade
laws were different then, but should the idea of our security
and technology protection be drastically different?
Recently, I made a list of what I consider to be top
technology cutting tools and e-mailed it to an associate in
China. I wanted to see what was available there. Every tool on
my list was available on the open market in China, most at a
cost with an exchange rate of slightly less than they can be
bought here. If they are in China, they could be anywhere.
The patent laws of America have been trashed. The Chinese
have absolutely no loyalty to the patent laws of America or any
other business deal. They get their hands on a product, take it
apart, reverse engineer it, and bring it back on the market at
a greatly reduced price. Some of our customers and associates
with patented products have found that there is apparently no
recourse or, in many case, even traceability to these acts of
piracy.
Recently, China was involved in the manipulation of our
steel prices and availability by buying large amounts of scrap
steel. It is a win-win for them. They need the steel scrap for
their production, and at the same time, our material prices are
being driven up. That created a material shortage, making us
less competitive in the world market. It equates to allowing
penny collectors to control the value of our dollar. The price
of steel being tied to the scrap steel price and availability
is wrong and needs to be reevaluated. We just rebuild our
ability to produce steel and other raw materials.
I was at the General Dynamics Land System Division in
Detroit on a sales call a few weeks ago. GD makes the armored
vehicles for our military. The procurement specialist told me
that they are having a difficult time getting armor steel. In
one instance, he had to request that a vendor machine a part
requiring three-quarter-inch-thick material out of three-inch
just to make deliveries. We are paying in many cases two to
three times what we were paying a year ago, and often the
required materials are not available or have very long lead
times.
I stated earlier that I do not believe that China, on a
level playing field, can be competitive. I also believe that,
given time, that will change. At the rate we are handing off
all that we know, that process can go very quickly. The longer
the exchange rate can be artificially deflated, the bigger the
jump start. I believe in fair trade, but let us keep it fair.
I have always considered myself very fortunate to be in the
manufacturing industry. I find myself, on a day-to-day basis,
not only loving what I do but passionate about the industry I
serve. If profits are driven out of manufacturing, then it goes
into survival mode. We can longer expand technology, properly
train new craftsmen, and maintain our facilities. Eventually,
we will lose what has made us strong. I believe the country
that has the highest ability to manufacture will be the world
leader. We have for a long time held that position, but we are
quickly becoming a service society and more concerned with the
trade than the make. Why would we give our manufacturing
capabilities away to a country that we cannot even trust in a
business deal? China wins; we lose.
[Mr. Goodpasture's statement may be found in the appendix.]
Chairman Graves. Thank you, Mr. Goodpasture.
We are next going to hear from Bruce Iglauer, who is
President and CEO of Alligator Records in Chicago, Illinois,
and you are here representing the Recording Industry
Association of America today. I appreciate you being here and
look forward to hearing your testimony. I think you have a time
constraint, too.
Mr. Iglauer. I have a plane, but I would very much like to
participate.
Chairman Graves. Absolutely.
Mr. Iglauer. So let us worry about your business, and I
will worry about mine.
Chairman Graves. Okay. I look forward to hearing what you
have to say.
STATEMENT OF BRUCE IGLAUER, ALLIGATOR RECORDS
Mr. Iglauer. Mr. Chairman, members of the Subcommittees, my
name is Bruce Iglauer. I am president, founder, and owner of
Alligator Records. I founded Alligator Records by myself 34
years ago in Chicago, the world capital of the blues. It was
fueled by my passion for the blues, a uniquely American music
full of emotion and history. I founded Alligator in a one-room
apartment with only $2,500 and almost no experience in the
record business.
I built an artist roster from among the bluesmen and
blueswomen who were formed in little clubs on Chicago's south
and west side African-American ghettos. Over the years, with a
roster of wonderful talent, Alligator has built a catalog of
230 albums, recording blues artists from all over the USA. I am
proud of the fact that literally hundreds of musicians and
their families have been able to survive and thrive as a result
of the work Alligator has done to bring them to a worldwide
audience. After 34 years, royalties from the sales of our
recordings are not only supporting the artists and the
songwriters but also their children and their grandchildren.
The music of Alligator Records is not pop music. It will
never be embraced by the multinational companies that market
the big hits. Alligator is like literally hundreds of small,
independent American labels across the country, labels that
record blues, jazz, traditional folk music, classical music,
spoken word, gospel, and bluegrass. Alligator, like those
labels, is dedicated to recording and preserving music of great
cultural importance. Because there is an audience for this
music, but not a huge one, it has become the province of
independent labels like ours. No one in the independent record
business is getting rich, but because we have developed a core
audience around the world who love our genres of music, we are
able to survive and continue to record this valuable music that
we love.
Unfortunately, the survival of companies like mine is
threatened today on a worldwide basis by piracy. The last
several years have been extremely tough ones for my industry.
The piracy of our music, physical and on line, has been the
major reason for our problems. In rough terms, the combination
of growing global physical piracy, easier Internet piracy, and
illegal CD burning generated a 20-percent sales decline in the
record industry since 1999. In the case of Alligator, my
company, the declining income since 1999 is closer to 35
percent. I have had to cut back on the number of recordings we
release and lay off staff members because of the decreased
worldwide market for legitimate recordings as a result of
piracy.
The impact of the music industry revenue crash has been
profound in human and creative terms. There are hundreds of
small companies in the U.S. that add to America's culture and
our cultural diversity that have been severely affected by this
wave of piracy. Successive rounds of job losses have occurred
in our companies, small and large companies, and there have
been additional job losses associated with the closing of
literally thousands of record stores in the USA.
The creative costs may be even more troubling. Artist
rosters have been slashed dramatically as record companies can
no longer afford to carry as many developing artists as they
would like to. Piracy robs the music industry, whether the
major labels or independents like Alligator, of the capital it
needs to invest in developing artists. The result is that fewer
artists are finding the financial support they need to put food
on their tables.
American recordings are sold all over the world. For my
company, our international business is about 25 percent of our
overall income. Sales of American recordings in the rest of the
world add significantly to our nation's trade balance and
ultimately to our national welfare. Our nation's welfare is
reduced, and our composers, artists, and all of the employees
of record companies, small and large, suffer when foreign
governments permit our recordings to be pirated in their
countries.
When it comes to ripping off American sound recordings,
China is one of the worst. The magnitude of record piracy there
eclipses any other country. China is potentially the biggest
market in the world for American music, maybe even bigger than
the USA. With the growth of the Chinese economy and their huge
population, the potential for massive sales of American music
in China in the next few years is great. It could be a huge
boon to independent companies like Alligator. It is not a
matter of if our music will be pirated in China but, rather,
when. Once that happens, this expanding market will be forever
lost to Alligator.
China has made some limited progress of improving its
antipiracy laws. It runs some raids and seizes lots of pirated
products. But more deterrent penalties are almost never
imposed, and piracy continues to thrive.
The challenge for all of us as Americans is to get China to
impose penalties on large-scale pirates operating there that
truly discourage such piracy. Unless and until they do, not
much is likely to change. The U.S. government must press China
harder to strengthen their antipiracy enforcement regimes. The
current systems in these countries do not work. Unless the U.S.
uses each and every option available to it, it will continue to
face the same situation we do today for the foreseeable future:
overwhelmingly pirate markets and lost opportunities for
legitimate U.S. companies.
Without wanting to sound melodramatic, I sincerely believe
the survival of the American independent record industry is
absolutely dependent on stopping the worldwide piracy in music.
Thanks for inviting me to testify today.
[Mr. Iglauer's statement may be found in the appendix.]
Chairman Graves. Thank you, Mr. Iglauer.
We are next going to hear from Al Lubrano,--did I get that
right?--
Mr. Lubrano. Yes, you did.
Chairman Graves. --who is president of Technical Materials,
Inc., from Lincoln, Rhode Island, and you are here representing
the National Association of Manufacturers. I look forward to
hearing what you have to day. Thank you for being here.
STATEMENT OF AL LUBRANO, TECHNICAL MATERIALS, INC.
Mr. Lubrano. Good morning, Chairman Graves, Chairman
Bradley, members of the Committee. My name is Al Lubrano. I am
the president of Technical Materials, Inc., a small
manufacturer of engineered materials systems primarily for the
electronics industry. In addition to other markets we serve, we
are also part of the auto industry supply chain and sell to
many of the major auto manufacturers' biggest suppliers. We
have approximately 200 employees located in Lincoln, Rhode
Island. I also serve as chairman of the Rhode Island
Manufacturers Association, which represents over 200 companies
in our state. That is my pro bono job.
I am pleased to testify today on behalf of the National
Association of Manufacturers. As a member of NAM's China Policy
Subcommittee, I participated in the development of our 2005
China Trade Agreement Agenda that included vigorous
participation and resulted in a consensus from both large and
small NAM member companies. The fact that we developed a
separate China policy shows how important this is to our
members.
Mr. Chairman and members of the Committee, I am here to
tell you that manufacturing here in the United States has some
serious problems, and we must, we must, address the China
issue. We are in favor of free, fair trade. The NAM seeks a
positive and balanced trading relationship with China that
reflects market forces as closely as possible. Without a doubt,
China has emerged as a leading world economy, and this has
meant significant new market opportunities for many NAM
members. However, many members' companies see prices of Chinese
so low that it is impossible for them to compete. Others see
their customers moving to China and cannot find new ones to
replace them.
I have seen this in my own company. As a result of fierce
Chinese competition, I have seen many of our customers lose
their business because their customers' customers have sought
refuge in one of two strategies: either outright moving of
production to China or forcing purchasing from lower-cost
Chinese manufacturers. Some of our customers tell us that their
customers will only pay the ``Chinese price.'' This is a recent
favorite of purchasing at Ford Motor Company.
The picture is not entirely grim. We can overcome China's
low-wage-rate advantage through innovation and the use of
technology. I have brought an example of how we can do that
here today. Right now, at TMI, we are selling high-technology,
plating material systems to companies in China that have not
been able to procure the high-quality product or service they
need from any Asian supplier.
In addition, we have recently developed a new material
system for the computer disk drive industry using innovative
technology and TMI proprietary processes. That material is here
today. These are called ``suspensions for disk drive arms''
used in the computer industry. We sell these to a U.S. company,
purely technology driven, committed to manufacturing in the
United States.
Our technology and innovation have kept us ahead of the
game with some of our customers, but I can tell you, it is not
going to be enough if we do not address the problems in our
trade with China and address these problems soon. NAM predicts
that our trade deficit with China is on track to reach $225
billion, billion. There is no question that eliminating the
severe yuan undervaluation is essential to creating more
balanced and sustainable trade flows.
China is a tough competitor with low wage rates and many
other artificial advantages which can be overcome. What we
should not have to deal with is currency so undervalued that
China has to spend $2 billion a year to artificially keep it
low. That is just not right. Would a considerably strong
Chinese yuan have beneficial effects? It certainly would for a
lot of U.S. companies.
When the NAM started talking about this problem almost two
years ago, we were only one voice. Now Treasury, the European
Central Bank, the IMF, Asian Development Bank, Canada, and many
others are all making the same point: It is time for China to
act. We were disappointed that in its recent report the
Treasury Department did not cite China for currency
manipulation, but we are pleased with the much tougher message
to China by Secretary Snow. The focus must now be October as an
absolute deadline. China must act by then.
We look to keep pressing this issue, and, in addition,
there are concerns that China's industries may benefit from a
wide array of government subsidies. As chairman of the Rhode
Island Manufacturers Association, I hear from member companies
that when they try to bid for a contract against Chinese
manufacturers of the same product, the Chinese price is below
their cost of raw materials, below the raw material cost. This
is clearly an artificial manipulation.
Earlier this year, NAM recommended to the USTR that the
administration develop a WTO case to deal with what President
John Engler calls ``China's grand larceny on a massive scale.''
Mr. Chairman, the issues I have outlined today are having
serious and negative effects of manufacturing in this country.
We have an obligation to see that America's manufacturing base
stays strong. We can do that within the rules of the
international trading system, but we must not be timid in the
insistence that those rules be enforced. Thank you very much.
[Mr. Lubrano's statement may be found in the appendix.]
Chairman Graves. Thank you, Mr. Lubrano.
We are next going to hear from Dave Blackburn with the
Thomas G. Faria Corporation,--is that Uncasville?--
Mr. Blackburn. Uncasville.
Chairman Graves. --Uncasville, Connecticut. He is here
representing the National Marine Manufacturers Association.
Thank you, Mr. Blackburn, for being here.
STATEMENT OF DAVE BLACKBURN, THOMAS G. FARIA CORPORATION
Mr. Blackburn. Thank you, gentlemen, for allowing me the
opportunity to address you today.
In an article recently published in the Washington Times,
Arnold Beichman, a Hoover Institution research fellow, made the
following statement: ``The huge Communist Chinese mainland,
government and people, is guilty of committing grand larceny on
a scale only comparable in contemporary history to the
expropriation of private property during the Nazi and Bolshevik
revolutions.''
If one has any doubts about the veracity of Mr. Beichman's
statement, one only needs to educate themselves in the details
of the drama that is playing itself out on your watch. Our
relatively small company of 350 employees is one of the vast
multitude of U.S. manufacturers whose products are being copied
with impunity by the Chinese. We produce engine-monitoring
instrumentation, including such products as tachometers,
speedometers, fuel gauges, et cetera. The level of technology
incorporated in these devices ranges from relatively simple to
quite sophisticated. During our history, we have supplied such
well-known companies as Ford, Chrysler, Caterpillar, and Harley
Davidson. We are currently the largest supplier of
instrumentation to the marine industry and the sole supplier of
every instrument panel installed in 100 percent of the combat-
ready Humvees now serving in Iraq and around the world.
The marine industry is represented here in Washington by
the NMMA, the National Marine Manufacturers Association, that
represents over 1,500 corporations and businesses. I sit on the
board of directors of that organization.
The marine industry supplies the products that provide a
boating experience to over 72 million Americans annually on the
13 to 14 million boats that are registered in the United
States. This industry also contributes over $30 billion a year
to the nation's economy, as well as over $7 billion a year in
wages. It is twice the size of the cruise ship industry.
While my company serves multiple marketplaces, I cite these
facts about the marine industry because it was one of the
large, U.S. marine, boat-building conglomerates that was
approached by the Chinese with an offer to sell identical
counterfeits of our products, including our address in
Uncasville, Connecticut, at approximately one-third of our
average sales price. In addition, this is an industry that is
rife with opportunity for the counterfeiters to steal more
American jobs and technology.
The sad fact is that there is almost no area of American
manufacturing that is not exposed to Chinese theft, and up
until now there is little to nothing that is being done about
it by our government. In fact, our government, in an indirect
way, has reinforced this unethical behavior by supporting the
admission of this country of minimal business ethics to the
WTO.
A little over 50 years ago, over 40 percent of the jobs in
the United States were represented by manufacturing. Today,
that number is closing in on 10 percent and dropping rapidly. A
significant driver of this statistic is the number of jobs that
have been lost to counterfeiting of American products.
The supervisor of my shipping department once worked for an
American company that was founded in 1847. Not too many years
ago, they employed 2,000 people. In the 1980's, the Pacific Rim
began a systematic program of copying their catalogs and
products. Today, the company is no longer in existence.
I know there are some among us who have countered that this
is not a problem because we are replacing these manufacturing
jobs with service jobs. What I clearly do not understand is how
anybody can equate a $22-an-hour job, which is the average rate
in manufacturing nationally, to an $8-an-hour job at Wal-Mart,
our nation's largest retailer. Wal-Mart, by the way,--I have
heard two different estimates--if they were a separate
individual nation, they would be the third-to-the-sixth-largest
trading partner for mainland China.
There is more at issue here than just economics. There is a
real threat to public safety. The counterfeit gauge that is
shown in Exhibit 1, which is now in the possession of the
secretary of commerce's office, is not accurate. I assume we
would all be appalled if we found out that a half dozen troops
in a Humvee were shot and killed because their engine failed at
a time of crisis due to inaccurate instruments in the vehicle
that failed to warn them of an impending engine failure at a
most inopportune time.
I trust that perhaps one or more of you might own a boat.
If you do, you might be sensitive to the prospect of coming
through a dangerous inlet or breakwater only to have your
engine run out of fuel due to an inaccurate fuel gauge.
Over a year ago, another small company just down the road
from us, Pfizer, Inc., received a complaint from one of its
Lipitor customers that in her recent prescription the pills
tasted strange. After laboratory analysis, it was determined
that the pills were counterfeited. This revelation led to the
removal of over 16 million doses of the drugs from pharmacy
shelves around the country. Virtually any popular medication is
a target. If any of you take a prescription drug, you are a
potential victim. I have attached a publication by the National
Association of Boards of Pharmacy--it is Exhibit 2--that lists
drugs susceptible to counterfeiting. I would encourage you to
read it. It might scare you to death.
The scope of the unethical activities of these pirates
appears to be limitless. In addition to copying other
companies' products, they are aggressive in taking steps within
their own governmental infrastructure to steal trademarks,
avoid establishment of a legal presence in the United States,
engage in activities to allow patents, and even use the threat
of violence to protect their ill-gotten market position selling
counterfeit products in countries around the world. I had one
of our sales representatives have his life, as well as his
family's lives, threatened if we interfered with their sales of
our counterfeited product in Colombia.
The Chinese government has disallowed Pfizer's patent for
Viagra. One of the requirements for gaining trademark
registration in China is that you must have a ``well-known
mark.'' China recently determined that Toyota was not a well-
known mark. An individual named Ma Zhongbo in China is
attempting to register a trademark as we sit here.
Some might question why the Chinese government seems to be
complacent or often illogical in their determinations. Perhaps
some of the reason for this lies in the fact that the
government has a vested interest in the economic gain to be
realized through unethical behavior.
A business associate of mine who has been in the plant that
is counterfeiting our product indicated to me that the managing
director of the factory that is producing the counterfeited
product is the head of the local Chinese Communist Party, and
the facility is government owned. I have been told this is not
an unusual set of circumstances and is more the rule than the
exception.
Given these facts, I am not surprised that enforcement is
difficult to obtain, and punishment is tokenism, at best. After
all, given the facts, are we not asking the government to
actually punish itself, given the relationship it has with many
of these counterfeiters? When was the last time you asked your
child, after committing an improper act, to punish himself or
herself and be repentant, and they actually did so? Have we
really become that naive?
About five months ago, I testified before the U.S. China
Commission. My recommendations to the Commission included the
initiation of a case before the WTO based upon the failure of
China to meet the requirements of WTO member economies. Those
requirements include laws for the protection of intellectual
property and the enforcement and imposition of penalties for
noncompliance. These requirements clearly have not been met.
In a report released on March 25th of this year, the
Commission has, in fact, now recommended that disputes be filed
by the United States in the WTO against China and that a 25-
percent, across-the-board tariff be established on Chinese-
produced products sold in this country. It is encouraging to me
that a government entity is actually stepping up to the plate
with a firm, concise, precise recommendation to take action.
I am not an economist or a necessarily astute student of
international political equations, just a businessman. However,
as with many issues in life and as a business person, I see a
problem with retaliatory actions taken by us that can result in
a number of counteractions by the Chinese. We are all painfully
aware of the huge budgetary deficits and national debt that
exists. A painful reality is that last year China held the
position of the second-largest holder of foreign U.S. Treasury
debt, second only to Japan. In addition, China had a net
increase in U.S. holdings for the year, whereas Japan, the
largest foreign holder, had a net decrease in holdings.
Recently, a comment by South Korea that they might shift
some of their investment to the euro sent our stock market into
an immediate tailspin. The panic subsided only after a
clarification of South Korea's position was issued. What would
happen if the second-largest holder of our foreign debt decided
to move away from the dollar?
In any event, the situation facing U.S. manufacturers such
as us and the gentleman sitting next to me and the other people
at this table is, indeed, daunting. We are faced with
competition whose labor costs them an average of 65 cents an
hour, far less regulatory complexity, and a cooperative
governmental alliance, albeit unethical at times. We cannot
stop competition. However, we are faced with unfair competition
from an international player who does not play by the rules, at
least not by the WTO's rules or their own government's.
Ironically, they often do play by the rules of the law in the
U.S. which often favor their rights over our own rights. At
times, our own government appears to be disengaged in any firm
resolve to address this problem.
A quote that I have used before but keeps ringing in my
ears is a statement by the former chairman of the Sony
Corporation, Akio Morita. In a speech to a group of high-level
business executives, he said, specifically at American
manufacturers, ``A world power that loses its manufacturing
capacity will cease to be a world power.'' I hope that his
prophecy does not become an epitaph for the tombstone of
American manufacturing. Thank you.
[Mr. Blackburn's statement may be found in the appendix.]
Chairman Graves. Thank you, Mr. Blackburn.
We are going to pause for just a minute, run and take this
vote real quick. We should not be very long at all. Mr.
Stallings, I apologize for that, but we will be back and resume
at that point. So we will just take a few minutes to run over
there, vote, and be back.
[Whereupon, at 11:24 a.m., a brief recess was taken.]
Chairman Graves. Again, I apologize for the interruption,
but votes are, obviously, one of the things that we do here.
Next, we are going to hear from Thomas Stallings with the
Funston Gin Company and the Funston Warehouse in Funston,
Georgia. He is here representing the National Cotton Council of
America.
Mr. Barrow, do you want to say anything in introduction?
Mr. Barrow. I appreciate the introduction. Go ahead.
STATEMENT OF THOMAS STALLINGS, FUNSTON GIN COMPANY, FUNSTON
WAREHOUSE
Mr. Stallings. Thank you, Mr. Chairman. Thank you and the
members of the Subcommittees for inviting me to discuss trade
with China. Representative Barrow, I would like to thank you
for your assistance during my visit here.
I am a cotton producer and the owner of Funston Gin Company
and Funston Warehouse in southwest Georgia. I serve as a member
on the board of directors of the National Cotton Council.
There are few international trading relationships more
complicated or dynamic than that of U.S. cotton and China. The
U.S. cotton industry is exporting an ever-increasing amount of
cotton fiber to China. At the same time, our long-standing and
best customer, the U.S. textile industry, continues to contract
in the face of the competition from textile imports. China is
the most competitive textile and apparel manufacturer in the
world, and with the elimination of all quotas on January 1st of
this year, China is rapidly becoming the dominant supplier of
textile and apparel products in world trade.
This development has ramifications for the U.S. textile
industry. A few statistics will illustrate the dynamic nature
of the trading relationship between the U.S. cotton industry
and China. In 1998, China imposed quotas on cotton imports and
imported only 359,000 bales of cotton from all countries. In
2004, China imported a total of 8 million bales, and at least 4
million of those bales were supplied by the U.S. In 2005, China
will import a total of 15 million bales of cotton. At the same
time, China's exports of cotton products to the U.S. continue
to increase dramatically while U.S. mill consumption of cotton
has declined, from 11 million bales to 6 million bales. During
the same period, U.S. consumers have increased their purchases
of cotton products at retail, but almost 90 percent of all
purchases are imports.
With that brief background, I can better address your
question. The answer is, yes, China does have barriers to fair
trade and engages in practices that provide unfair advantages
to its manufacturers. The cotton industry is deeply concerned
by the use of tax rebates to encourage exports. We are troubled
by the widespread use of subsidized or forgiven loans provided
to China's domestic textile industry, and we believe that the
maintenance of an undervalued currency constitutes an unfair
trade practice.
As a small business operator, I know it is impossible to
compete with another firm that enjoys a 30-percent cost
advantage due to an undervalued currency and that probably has
access to free capital in the form of loans that do not have to
be repaid. I also know that the U.S. textile firms are
concerned about the piracy of their fabric designs and
unauthorized use of their logos and brands, which they have
spent millions of dollars developing.
When a part of the cotton industry enjoys the benefits of a
growing trade in raw cotton, there are problems. We have
consistently expressed our concerns with the way China has
implemented its market-access commitments under the WTO
Accession Agreement. We have worked closely with USDA and USTR
to attempt to convince China to modify its administration of
tariff rate quotas.
Recently, China has announced its intention to impose a
variable rate tariff on imports of cotton over the TRQ. This
will affect the price of cotton to the mills, and we are trying
the determine whether this new tariff would effectively amount
to a price support for Chinese cotton farmers. We have also
worked with USDA, USTR, the Chinese government and industry to
resolve contractual issues, arbitration practices, and quality
standards.
Mr. Chairman, China is a dominant factor in the world
cotton and textile markets. It is imperative that the U.S.
cotton industry continue to cultivate China as a customer for
our fiber. It is also critical that we work with Congress and
the administration to insist that China honor her WTO
commitments. That is why we are actively supporting efforts to
convince China to move to allow her currency to be valued by
the market. We also support the use of textile safeguards, as
authorized under the WTO Accession Agreement, to allow the U.S.
industry to adjust to the elimination of quotas.
As a business operator, I contend that the adjustments
cannot be accomplished as long as Chinese manufacturers have
the competitive advantages provided by an undervalued currency,
tariff rebates, nonperforming loans, and unchecked piracy of
valuable designs and brands. We welcome China to the WTO, and
we value her as a trading partner, but she must be held
accountable to the rules and the commitments of the WTO
membership.
Mr. Chairman, again, I thank you for allowing me to
testify, and I will be pleased to respond to any questions at
the appropriate time.
[Mr. Stallings' statement may be found in the appendix.]
Chairman Graves. Thank you, Mr. Stallings.
I am going to start out with questions. I am going to tend
to direct them, but feel free, if I have not necessarily
directed a question towards you, and you would like to give
some input, do not hesitate. My first question is for Mr.
Goodpasture and Mr. Lubrano.
I am curious, as far as customers go, have you had
customers tell you they are holding you to the so-called
``China price,'' or are you having problems with that as far as
customers more interested in price rather than quality, that
they are willing to sacrifice quality? Do they know that many
of these counterfeited products coming out of China are
inferior, I guess you might say, to those products you are
producing? Did I make myself clear enough?
Mr. Lubrano. Yes. I will give you two examples. It is
typically our customers' customers who have said to us that
they have been forced by people like the auto industry to a
China price, and they just cannot do it. So the purchasing
people in that industry will go look at what they can buy the
product from China for and then say to the manufacturer, ``You
can have this business, but this is the price I am going to
pay,'' and in some cases, it is below the cost of raw
materials.
I have seen that. It has happened. Our customers' customers
have talked to them, our customers have talked to us, and what
happens is the whole supply chain loses the business. So we
lose it, our customers lose it, and their customers lose it.
I can also give you an example of counterfeiting, the
cheaper product. I was with a company in Italy recently that
buys product from us. They manufacture relays. The name of the
company is Fender, and the director of purchasing handed me two
relays. I looked at them, and I said, ``Okay. What is your
point?'' His point was, one of them was not his; it was a
counterfeit product from China that was selling at about two-
thirds of what he could sell the product for. His company had
spent, he told me, over $300,000 on lawyers. The lawyers were
promised a meeting. The Chinese government was going to take
these people to task. The lawyers got there, and they could not
find the company. So those are two real-life examples of
exactly what we talked about.
Mr. Goodpasture. I had a meeting Tuesday before I left for
here with a current customer that I have that said, if we could
not drop prices, they would have to be forced to go to Asia,
and they are already. It is kind of ironic. At this point, we
are in kind of a unique position, and we have not been affected
because we are a job shop that can go different directions.
So my response was, now is a good time because I know the
quality is lower in China, and I know that they would have a
difficult time getting these particular parts made, but that
will change with time. There is high tech going over there. We
have a vision system that is very high tech. I was talking to
OGP, and their biggest customer is China right now. They make
high-tech stuff. So it is going to change, and they are going
to get better, and they will own the world of manufacturing if
we do not do something.
Chairman Graves. Mr. Iglauer, have you had labels, your
actual label, counterfeited or just printed in China?
Mr. Iglauer. The honest answer is I do not know because the
Chinese counterfeit products that are being manufactured in
China right now are primarily being distributed in China. I
have a distributor in Hong Kong who has been trying the set up
a distribution deal for us in China, a legitimate one, and at
this point, he is being told the marketplace is not there
partly because of the marketplace being flooded with
counterfeit goods.
As to whether it is specifically my product, I cannot
answer that. I can tell you that my product is regularly
counterfeited in Russia and makes its way into eastern Europe,
and the counterfeits are brilliant. They are gorgeous. They
sound great, they look great, and the artists, songwriters, and
the record company who invest make nothing.
Chairman Graves. How did you figure out, I guess, when you
saw that first counterfeit?
Mr. Iglauer. Actually, I have deejays in Lithuania who play
my music on the radio, and they sent them to me and asked me if
we had manufactured those. It was a shocker because they were
so good.
Chairman Graves. Mr. Blackburn, you handed out some
material. It obviously looks like the same thing. I would be
interested in your reaction the first time, or how you figured
out the first time that obviously some of your products out
there were not your products.
Mr. Blackburn. Actually, the first time was back around
1990 or so, and that was in the South American market where we
knew the Chinese were counterfeiting our product. It was a
small part of our overall business, so we did not pursue it
aggressively. This is the first time that I have had a
situation where they have actually approached one of my larger
domestic customers in an attempt to sell a product. In fact,
that customer was in their factory and hand carried the sample
back to me, so there was no doubt about the authenticity of it
as a counterfeit.
There was one visual characteristic that made it obvious it
was not ours, and it was a little wrinkle in the bezel. It is
the type of cosmetic flaw that we would not let out of our
factory, and most people would not even notice it, but because
it is our business and our product, I did. We put it on a test
stand, and it was grossly inaccurate. That particular item was
a volt meter.
Unfortunately, the counterfeits are so good, and they carry
our name, address, our inspector's initials on them, a CE label
of ours, that in our warranty department, if it came in and was
a counterfeited gauge, most of my people would not recognize it
as a counterfeited gauge. We would pay warranty costs and
replace the instrument and suffer from our reputation in the
field.
Chairman Graves. Obviously, looking at the pictures, they
have got the patent number on there and everything.
Mr. Blackburn. I saw one counterfeit where we had a nick in
a case mold where foreign material had created a nick in the
mold itself, and they had even duplicated the nick in the case.
Chairman Graves. Mr. Barrow?
Mr. Barrow. Thank you, Mr. Chairman.
Shifting gears for a second from the subject to widespread
theft of property rights as an unfair trading practice to the
subject to currency manipulation, I want to ask Mr. Stallings,
help put this in context for us. Can you tell us how the
Chinese policy of pegging its currency to the value of the U.S.
dollar helps Chinese agricultural producers and hurts American
agricultural producers?
Mr. Stallings. Yes, Congressman Barrow. The pegging of the
currency tends to keep the U.S. cotton products higher. It also
inflates the Chinese cotton products for the Chinese producer,
but in the counterbalance of things, the U.S. dollar will be
priced higher, and the Chinese currency will be lower.
Therefore, you could buy, as an example, from Fruit of the
Loom. It would not be the same t-shirt. It has the same label.
The thread count is different. But you could buy three Chinese
Fruit of the Loom t-shirts for the price of one U.S. t-shirt.
Wal-Mart and Target are flooded with those. The devaluation of
the currency is a very, very important thing that we need to
control.
Mr. Barrow. And it seems to me, when talking with earlier
witnesses about the difficulty of marshaling the evidence to
support various claims that we have of unfair trading
practices, this seems to be the one that is the most
straightforward, the one that can be brought with the least
amount of difficulty because we can see directly what the
cause-and-effect relationship is. Thank you.
I want to direct another question, if I can. Do you have
something you want to add, Mr. Stallings?
Mr. Stallings. I would add that knit goods, since January
1st when quotas came off, they are up 800 percent from China.
Mr. Barrow. Directing a question to the other members, I
want to talk about energy practices and energy costs in the
Chinese economy as opposed to ours. Congressman Graves and I
are co-authoring a bill that is seeking to fix what is broke
[sic] with the natural gas futures market in this country, and
it raises a question in my mind as to whether or not Chinese
manufacturers are encountering the same kind of problems that
American producers and American manufacturers are encountering
with respect to energy costs. Are they experiencing the same
problems? Do they have any of the difficulties that American
producers and manufacturers are having with respect to the cost
of energy?
Mr. Iglauer. Our experience has been, when I am over there
talking to some of our customers who actually put facilities
there, that energy is not reliable. Places will have to shut
down because they cannot get electricity. Depending on where
you are, that is more of a problem. If you are in a remote
area, it is more of a problem. If you are around Shanghai or
Beijing or Shenzhen, it tends to be less of an issue, but they
are having some problems with energy.
Mr. Barrow. Reliability is an issue that would seem to work
in our favor.
How about the price? How about the price?
Mr. Iglauer. It does not seem to be price. It seems to be
reliability more than anything else, from my experience. I am
over there a few times a year.
Mr. Barrow. Are there subsidies in the energy market that
you all are aware of? For example, do they have any difficulty
in the natural gas market, for example, the stability of the
price of natural gas?
Mr. Iglauer. I do not know the answer to that.
Mr. Barrow. Thank you, Mr. Chairman.
Chairman Graves. Mr. Bradley?
Mr. Bradley. Thank you, Mr. Chairman.
There has been a lot of discussion about currency this
morning, and certainly anybody that reads the Wall Street
Journal or any of the other business presses would know that
there has been a lot of oaring back, if you will, on the whole
currency problem and whether if there are adjustments, and the
Chinese currency floats to the dollar as opposed to pegged to
the dollar, that it would really help American manufacturing,
and, in fact, some people have even said it could destabilize
the world economy. Do any of you have any thoughts on the
efficacy of removing the peg and having a floating currency and
what, if any, positive impacts there will be, and could you try
to quantify that?
Mr. Iglauer. I would caution that there are no silver
bullets. I think fixing the currency and letting it float
should be a remedy that we take, in that everything is supposed
to be governed by a free market economy, and that will
certainly make the situation fair with respect to our currency,
but I think that I would throw some caution to the wind here,
too. It is more than just a currency issue, and you have heard
from colleagues here today that it is a much broader-based
issue than that.
Mr. Goodpasture. I would say that the 8.3, if it is a true
currency right now, manufacturers would be buying at 8.3 plus
shipping, and they are not. Average costs that manufacturers
are buying in China for is around 40 percent, 50 percent what
they would pay here. So if that was changed to where it could
float, that could be a primary source, but if that does not
work, I think tariffs is the only vent. We have got a mass
exodus of large corporations not only buying from China but
going to China and setting up factories. The longer that
continues, the more pressure our government is going to get
because people are not going to want to lose once they make the
huge investments in Chinese factories to now just, all of a
sudden, that monetary change where they were buying for 40
percent, and now maybe they are even, even. So I think tariffs
should possibly be an answer behind the exchange.
Mr. Lubrano. There is one issue we did not discuss, too.
The fact that the currency is undervalued also makes it a lot
more attractive for foreign investment in China, and that is a
huge problem as well. We really have not touched on that
subject here today.
Mr. Bradley. More a question to Mr. Lubrano from the NAM
perspective. Would NAM be supportive of implementing those 27-
percent tariffs that the Senate has talked about?
Mr. Lubrano. I know the NAM position is that we have to
follow the IMF and the WTO and do things in a manner that is
consistent with what we are trying the accomplish and not go
off and ignore those because once you set that kind of
precedent, I think the NAM is concerned, and rightfully so,
that you could lead to chaos, and I would say that the NAM
position of going through the IMF and the WTO is the
appropriate way to go.
Mr. Bradley. And has the administration been aggressive
enough in pursuing WTO remedies?
Mr. Lubrano. I cannot speak for NAM, but if you are asking
me, I would say absolutely not.
Mr. Bradley. Even despite the fact that Secretary Snowe and
Secretary Rice have highlighted recently currency problems.
Mr. Lubrano. I think the example of how the WTO can
effectively work has been cited earlier with respect to the
FISC and what remedies were imposed through an appropriate
channel: going to the WTO, making the case, U.S. losing, and
then tariffs.
Mr. Bradley. U.S. winning, I think you mean.
Mr. Lubrano. We lost, and the Europeans imposed tariffs.
Mr. Bradley. Oh, in Europe, yes. That was the point I was
making earlier.
Mr. Lubrano. I think we need to take the gloves off and use
the same kind of remedies. I mean, we are getting killed.
Mr. Bradley. Would all of you agree with that?
All. Yes.
Mr. Bradley. And would you all agree that that is our best
remedy?
Mr. Stallings. I think it stretches all the way across to
all of the industry that is represented here today. The
benefits that you have with the WTO; we had no control over
China, but now it is in the WTO, and the rules and the remedies
are in place. They need to be enforced, the same as Brazil
entered their challenge against the cotton program.
It is evident that China is definitely not complying with
the WTO, and they have a two-sided door that we are exporting
cotton into that country, and they are our customer. They are
our largest customer, but they only let mills use U.S. cotton
that are exporting it back to the U.S., and then the mills that
they run their cotton, it is consumed domestically in China,
and they also price it however they want to price it.
Mr. Blackburn. The fact of the matter is that China is not
abiding by the rules as a member of the WTO, and they have been
in the WTO for a number of years now. They have consistently
flaunted those regulations, made false promises, have not
provided any type of enforcement, and we still are talking
about bringing a case against them. There is a mechanism in
place, but we have to do more than talk; we need to do
something.
Mr. Bradley. Thank you.
Chairman Graves. Mr. Lipinski?
Mr. Lipinski. Thank you, Mr. Chairman. Thank you, all of
the witnesses, for your testimony today. I represent a district
that has lost thousands of manufacturing jobs. We still do have
some manufacturers left, and I am continually hearing from them
very similar concerns that you all have said today. Just
hearing you again on these things really is frustrating and
infuriating that this is going on, and it seems like nothing is
being done to stop the rampant piracy--they are letting it
occur, the Chinese government, and sometimes, as we have been
told, they are actually doing it--and also the very much
undervalued currency which they have pegged.
There are a lot of questions I have. I just want to focus
on two sort of broad questions. It seems to me that this is
being done because the Chinese government has determined that
if they can do this for long enough, they can take the
manufacturing out of other countries, establish it in China,
and maybe sometime down the road they will decide that they
will play fair, but at that point, they will have robbed other
countries, especially the United States, of the manufacturing.
So two broad questions: First of all, and I want to hear
briefly from each of you, is it possible in the industry that
you represent if tomorrow we went and did all of these things
that we have talked about here that the government needs to do
to try to halt this loss of manufacturing jobs, first of all,
can we ever gain back any of this manufacturing; and the other
question is, is there a point at which you see there is almost
no turning back, that we will have lost so many jobs in the
industry that you are here representing that that will be it?
Is there a tipping point, and do you think there is a time
anywhere, say, how many years in the future, where essentially
we will have almost killed off that industry in this country?
So I will start with Mr. Goodpasture.
Mr. Goodpasture. It is never too late, but it is late. It
would be very difficult. We have given them a lot of
technology. Because of the American presence in China, it is
like it is okay to send our top technology over there. There is
very sophisticated equipment that is now being bought, and
China is the main purchaser of it. The main market is in China.
So I think it is late. If the brakes were put on
completely, they have that technology. Whether they can develop
it on their own, I do not know, but I will see that this fall.
Mr. Iglauer. The potential for China to reverse itself from
being a country that is stealing copyrighted materials to being
a consumer of copyrighted materials would ideally lead to more
jobs here. They might not be the same jobs that have been lost,
but I could foresee China as the largest consumer, as I said
before, of American music in the world. It is the largest
country in the world. There is an international fascination
with American music.
Could they produce it there legally? Yes, under license,
paying the owners of the copyrights who thus pay the artists
and composers who create it. Could that marketplace create more
jobs at the creative end, at the artist-and-composer end, in
the United States? Absolutely. Those people are losing their
jobs because American record companies are shrinking as a
result of worldwide piracy.
So I can foresee a new batch of jobs being created which
would not necessarily be the same batch of jobs that have been
lost.
Mr. Lubrano. I believe in American ingenuity, and I think,
as I go around the country and look at what our customers are
doing and what we are doing, if these other issues were fixed,
I really believe it would stem the tide. I agree it is late,
but it is not too late, and I think what I would like to see is
not handouts but a partnership between the American
manufacturing community and our government where we were
working together more closely to get these problems resolved,
and we are getting help to get our cost structure in line.
N.A.M. has put a survey together with the Manufacturing
Alliance. Right out of the box because of rules, regulations,
and other things placed upon American manufacturers, we come
out of the box with a 22-percent disadvantage versus our top
ten trading partners. Well, you take 22 percent, and you take
anywhere from 20 to 40 percent of the undervalued yuan, I mean,
right out of the box, we are almost 60 percent behind the eight
ball. If those things got fixed, I think, with American
ingenuity, we could certainly compete much more effectively on
a global basis.
Mr. Blackburn. I believe that ultimately China, and we have
not mentioned India, a country who is soon to take over China
as the most populous nation on earth and is really a very
central area of high-technology development, that ultimately
that area of the world will be the manufacturing center of the
world. There is little that we can do, I think, to stop that
from happening. There are too many forces in place that are
driving that. A great many of them are economic. Certainly,
some are cultural and have to do with government policy.
Anything that we could do to slow that down, and I think
that is all we can do is slow down the transfer of
manufacturing and manufacturing jobs to the Pacific Rim, would
be helpful. Certainly, letting the currency float so we are not
dealing with a $22- to 65-cent-an-hour, cost-of-labor
differential would help. Anything that could be done in terms
of, as my associate next to me mentioned, more of a working
partnership between our governments and our industries working
together on regulatory fronts that are, at times, very
burdensome and that our counterparts in China do not have to
deal with are an issue.
I am not supporting that we loot our ground water and do a
lot of things that the Chinese are doing, but somehow we have
to take actions that will help to level the playing field and,
at the very least, eliminate unethical behavior. That is really
a core issue here, is the unethical behavior.
I wonder how the Chinese would react if the U.S. Patent and
Trade Office said, ``Because you are not complying, we are not
going to accept any more applications for Chinese patents, and
any Chinese company that has patents here, we are not going to
enforce them.'' That is what they are doing to us. We are, I
think, too ethical and too moral a country perhaps to do that,
but that, quite frankly, after dealing with folks from the
Pacific Rim for the last 25 years in business, it is the only
language they understand. That is the reality.
I think that the way in which American manufacturing will
be able to maintain some presence in the worldwide
manufacturing community is through innovation, through quick
deliveries. There are basically three or four things that
determine why you go to a supplier or a manufacturer. Number
one is price. Number two is quality, although Dr. Demming would
say it should be the other way around, but we no from
experience that that is not the case. The last is delivery
performance.
So the way we are, as a company, fighting it is with
delivery performance with quality. We cannot compete on price.
My people do not make 65 cents an hour. I guess the bottom line
is I look at these barriers and say, ``I am a combat veteran. I
really believe in this country.'' My board of directors are
saying, ``Why the hell do not you move the production to
China?'' Well, I just do not want to do that. If things keep
going on the way they are, I am not going to have any choice. I
hope I am retired by then because I do not want to be in a
position where I have to do that to survive. That might have
strayed a little bit from your question.
Mr. Lipinski. Thank you.
Mr. Stallings. I, too, feel that America brings a lot of
honesty and integrity and quality to everything we produce, and
I like to buy on quality rather than price. I would rather
sleep on a nice sheet with good thread count that brings
comfort to me than I have one that the first time it goes to
the cleaners, it comes back, and all of the thread is coming
out of it. And quality means a lot in the cotton industry, the
textile industry.
Fifty percent of our mills have already closed, 70 percent
in Bangladesh. The Bangladeshis are unemployed. They do not
draw unemployment insurance. They do not have any means to
protect themselves from what the Chinese are doing to them. In
all of your lesser-developed countries,--we have helped in sub-
Saharan Africa, places that we have got a textile industry that
was growing and booming the same as ours in 1988--it is already
destroyed. But it is never too late to do something about it.
You can rebirth an industry, but the biggest thing I see as a
stumbling block is that we go into the WTO, and we sign all of
the rules and regulations, and we agree to comply, but we do
not enforce the rules and regulations upon the ones that we
trade with. We do not have to reinvent the wheel; we just have
to enforce the regulations that is already in place.
Mr. Lipinski. Thank you very much.
Mr. Fortenberry. Thank you, Mr. Chairman, for holding this
very important hearing, and thank you, gentlemen, for your
insightful testimony.
I am going to attempt to summarize some of the complexities
that we have heard today. I would like you to comment on that,
and then I am going to move into two questions I would like
those of you who feel they would like to respond to those, if
you are interested.
In regards to the unfair-competitive-advantage question we
are talking about here, it comes down to three categories of
things, it seems to me: the counterfeiting issue; the issue of
currency manipulation; and then other economic inequalities,
such as unfair government subsidization, lax regulations,
environmental and otherwise, and unfair labor practices when
compared to our country.
But let us look at this loss of economic opportunity to
China from two ends of the same question. The first is, and if
you could comment on this, what do you see in regards to
targeting particular manufacturing industries, either by
subsidization of the government or willingness to take long-
term losses, until there is market capture as a stated
intention or policy of Chinese officials or Chinese officials
working in close cooperation with other international business
entities?
Second, let us discuss the mechanics of what you just
suggested that you do not want to do. How would you move your
firm to China? What are the mechanics as to how that happens?
How do American firms and otherwise enter into agreements and
with whom to accomplish that end? My understanding, if you
approach the Chinese with the intention of moving a facility
there, you are guaranteed a certain amount of labor, a certain
amount of output every day. That is the way it happens.
But I would like any of you who have insight into those two
questions to please comment.
Mr. Blackburn. I do not know about the other gentlemen, but
I fairly regularly get letters from folks either in the States
that have migrated here from mainland China or people in
mainland China themselves who have offered their services to
help me set up factories. I would imagine, based on some of the
experiences that have been related to me, that I could probably
move the entire factory there and have it operational in three
months.
Mr. Fortenberry. Again, with a guaranteed labor cost and a
guaranteed output.
Mr. Blackburn. They will build the building for me.
Mr. Fortenberry. Who?
Mr. Blackburn. There is usually an intermediary because the
government does not want to be identified, I do not think,
themselves, but you know the government is behind it to a great
extent.
An individual who is the president of a large buying
association who actually imports a fair amount of goods from
China for the marine industry was talking to a company--I
believe it was about building a fiberglass plant. So they had
some fairly serious discussion. He wanted to know about the
facility and how long it would take to build it, and they said,
Oh, not long. He went back three months later, and there was a
250,000-square-foot building erected sitting ready for
operation. He had not even made any promises yet.
Mr. Fortenberry. Anybody else?
Mr. Lubrano. I think the situation is very different in
different regions. I think the one overriding thing that we
experience as we deal with the Chinese and we export product to
China,--we have a lot of product going to Malaysia, a fair
amount of product going into China, and there are tremendous
opportunities now in some products that we make for sales in
China--the issue for us is when we sell to a company in China.
For example, we have a customer, a Singaporean company, who
moved their manufacturing into China. Once the manufacturing
gets into China, and you are dealing and getting product into
China, the first question I am asked when I go there, and I
will be there next week, is, when are you putting up your
facility? We need local content. The government is requiring
local content.
So there is pressure for suppliers to set up in China.
Relative to how you do that depends on what you are trying the
do and varies tremendously area by area. I think our approach
is probably going to be the joint venture route ultimately. The
biggest concern we have, as stated before, is, how do I protect
our intellectual property? Our company is priority processes,
intellectual property.
I have heard so many horror stories about people setting up
facilities there, and before they are even in production, there
is another factory half a mile away producing the same product
that has got all of the drawings, all of the processes. And one
company I know of, High Technology Ovens,--I heard the story
the other day--in Minnesota, they never even got to produce
anything. They just packed it up and left after investing
millions of dollars. So these are more the concerns.
How you do it, I think, is dependent on where you are going
to be, who you are interfacing with, and what the Chinese
customers you are trying the sell to are trying the force you
to do. I hope I answered your question.
Mr. Fortenberry. Well, it is obviously complex. It cannot
be summarized in a simplistic fashion because of regional
issues, because of intermediaries, other perhaps unknown,
behind-the-scene players that may be government officials or
maybe not. I understand the complexities. But I think you
understand the key point, and if any of you want to discuss the
other issue as well: Do you know of intentional targeting of
particular small manufacturers in this country where there has
been unfair subsidization by the Chinese government through
various means in order to capture a particular market,
sustaining long-term losses in order to capture a particular
market, running someone here out of business?
Mr. Blackburn. I believe the subsidy comes somewhat
indirectly again. My understanding is, and this could be
provided through an intermediary or a joint venture situation,
if you go to the Chinese government with a pro forma business
plan, they will build a factor for you at little to least cost
going forward. However, your retention of that lease depends
upon you realizing your business plan and filling the factory
up.
Now, the easiest way to do that is to pick a product that
is popular somewhere in the world, any product--there are no
products that are immune to this right now, none--to copy it
because you avoid the R&D, you avoid all of the NRE expenses up
front that we have to build into our prices. Maybe you sell it
outside the United States. The rest of the world is still a
very large market, and you fill the factory up. You would have
to do it quickly. You only have so much time to do that, or you
lose your lease, and you lose your free factory. So that is not
a direct subsidy. We get into, I guess, the definition of the
word, ``direct'' and ``indirect.'' It is reasonably direct when
somebody provides you with a manufacturing facility basically
free of cost.
Mr. Fortenberry. That is a form of economic inequality that
does not exist on this side, and I think that is what we are
getting at, is to try to level the playing field so that we can
fairly compete, not to shut down competition, not to shut down
trade, which can be very beneficial to all persons on either
side of the globe, but to ensure that we have a level playing
field. I think that is the bottom line here. Thank you all for
your insights.
Chairman Graves. Any other questions? Mr. Barrow? Mr.
Bradley? Jeff, any?
Well, I appreciate all of the witnesses being here today.
This has obviously been extremely informative, and we have a
tremendous opportunity, I think, in China. But when we put our
manufacturers and businesses at such a competitive
disadvantage, it does not matter whether it is through currency
manipulation or overregulation or piracy or labor issues, you
know, it is an extreme disadvantage.
Mr. Bradley and I are going to, and, I think, Mr. Barrow
obviously wants to be a part of it, too--we are going to
explore what we can do through our Committees, through our
staff, to put some more pressure on the Administration to try
to work through some of these remedies, try to hold China
accountable through some of the policies that are already in
place, try to enforce some of the WTO regulations trying the
keep China in check as much as possible. But we are going to
see what options we have.
We will, obviously, take these findings and turn them over
to other Committees that have jurisdiction in this area, but I
do appreciate all of the witnesses coming today. I know you
have traveled, many of you, a long distance, and that does mean
a lot to us, and I appreciate what you all are doing, and I
hope you hang in there and are very profitable. Thank you very
much for being here today. This hearing is adjourned.
[Whereupon, at 12:30 p.m., the Subcommittee was adjourned.]